AML Compliance: Putting Policies in Place
For many years financial institutions worldwide have been perfecting their anti-money laundering (AML) processes and procedures. More recently, corporations around the globe are getting to grips with mounting levels of regulatory compliance and the issue of AML is creeping higher up the corporate agenda.
Over the past decade, businesses have had to come to grips with new compliance regulations as money laundering operations became increasingly sophisticated. Illicit funds from these ventures have been used to not only line the pockets of criminals but also finance acts of terrorism.
The terrorist attacks of 2001 sparked much controversy and acted as a catalyst for AML legislation, as governments realised the implications money laundering could have if it continued, unchecked, at its current levels. There were also numerous developments in AML software as banks and businesses demanded enhanced technology expertise and solutions to protect themselves from terrorist financing links, no matter how unwitting.
Corporations have traditionally tasked banks with the screening and identifying of suspect financial transactions and dealings. However, in today’s current landscape, where brand reputations are at stake, protection is crucial. In response, corporates have taken screening processes in-house to quickly identify money launderers and terrorists and make certain scrupulous checks are made.
In 2007, the Third EU Money Laundering Directive became operational, providing EU companies with a common basis for implementing the revised Financial Action Task Force’s (FATF) recommendations on money laundering. Similarly the US implemented the USA PATRIOT Act , which became effective in 2001. However, similar legislation to guide business practices in emerging markets is still evolving.
Despite this, companies in emerging markets are implementing compliance measures because compliant firms are reticent to do business with them otherwise. Companies that do not have proper AML screening processes in place may unintentionally expose others to potential terrorist financing links or other illicit business dealings.
As firms strive to improve compliance, corporate treasurers and compliance officers are on a steep and continuous learning curve. Although the roles of the corporate treasurer and compliance officer are separate, there are growing instances where the two roles benefit from closer cooperation. Working in isolation, the compliance officer may not be sympathetic to the needs of the treasurer and might implement policy, which could hamper efficiencies. By working together they can safeguard their business from money laundering initiatives without impacting one another’s role.
In order to prevent money laundering and drive compliance, corporates should take the following precautions:
Corporates need to be aware of the rate at which AML regulations evolve. Global caution lists and government sanction lists have long been a part of the regulatory due diligence process; providing a source of information about existing and new high-risk entities involved with money laundering, financial fraud, arms proliferation, drug trafficking, collateral crimes and terrorism. These lists include the Office of Foreign Assets Control (OFAC), HM Treasury, European Union List, United Nations List, Swiss SECO List and many more covering most jurisdictions worldwide.
However, as more sophisticated technology makes it easier for terrorists to set up illicit money laundering organisations at an increased rate, these caution lists need to be updated more frequently. Whereas in the past they used to be revised once a month, now they often need to be updated several times each week. With this in mind, it is essential that corporates work closely with their providers to make sure they receive the most up to date information. Only by doing this can they ensure effective screening against money launderers, which will not be as certain if they rely on those systems provided by banks alone.
Corporates should also delve deeper and incorporate enhanced due diligence (EDD) into their screening processes. Unlike screening for sanctioned entities, where doing business means breaking a law, EDD is about risk abatement with respect to customers and employees alike. In addition to screening companies, EDD considers certain types of individuals in accordance with their role, position in a government or enterprise and access to funds. Politically exposed persons (PEPs) are one such example of a customer group that would be flagged by EDD and it would be the corporation’s responsibility to decide whether business or association should continue with such a person.
Corporate treasurers must make sure their compliance technologies incorporate as many up-to-date EDD screening processes as is appropriate for their firms’ risk tolerance such as know your customer (KYC) and know your employee (KYE) methodologies. These offerings help minimise the risk of money laundering activities as early as possible in the money laundering chain.
The KYC aspect evaluates records according to several risk factors such as prior convictions, fraudulent histories, personal involvement with activities deemed as a security threat or that are linked with individuals alleged to be threats. Similarly, the KYE aspect reviews the background of a firm’s employees. It researches prior employment and credit history, personal or business reputation and civil litigation cases the prospective employee was party to.
Given the changing nature of compliance and the potential cost of implementation, corporates need to make sure solutions can cope with any future regulations. As threats to the business continue to evolve and become more sophisticated, so must their systems.
AML technology is now an embedded aspect of business and will continue to grow in prevalence as more and more industries understand the added layer of protection it affords their business in an increasingly turbulent world. As a result, companies who turn to AML need to search out those vendors that can supply flexible solutions, capable of being tailored to meet evolving needs as they grow their business in order to insulate their brand from all external threats.
The ability to identify and thus pre-empt threats, both internal and external, is a major step in safeguarding company credentials. As we move forward, it will increasingly be the responsibility of the corporate treasurer to champion AML issues along with the compliance officer and seek out new ways to safeguard the brand from becoming associated with any entities involved in money laundering.